Public Bill Committee

[Sir Nicholas Winterton in the Chair]

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003)

Nicholas Winterton: I am delighted to be in the Chair for this sitting. I fear that you will have to put up with my presence this afternoon as well. The weather is cooler than it has been, and I am confident therefore that we shall make even speedier progress with today’s deliberations.

Schedule 38

Disclosure of tax avoidance schemes

David Gauke: I beg to move amendment No. 296, in schedule 38, page 383, line 31, at end add—

‘Amendment of Tax Avoidance Schemes (Information) Regulations 2004
(8) The Tax Avoidance Schemes (Information) Regulations 2004 (S.I. 2004/1864) shall be amended by adding after regulation 8(10) the words “and if the accounting period or year of assessment in which the reference number is received differs from the accounting period or year of assessment in which the first transaction forming part of the arrangements is entered into, then the reporting requirement in this regulation shall relate to the later of those two periods (unless a tax advantage arises in an earlier period in which case the reporting shall be in that earlier period).”’.
May I say on behalf of the whole Committee not only that it is a pleasure for you to be here, Sir Nicholas, but that it is a pleasure for us that you are here. We look forward to your presence for the rest of the day.
The amendment relates to representations that the Treasury has received from PricewaterhouseCoopers, which has identified an issue regarding the tax avoidance scheme disclosure rules. Taxpayers have to put the scheme reference number on their tax returns, and a difficulty arises where there is a delay, which can sometimes be substantial and is not uncommon, between making an arrangement available to a client and the commencement of implementation. As a result, a client in receipt of a scheme reference number may reach the filing date with no obligation to report that scheme reference number on the return, as implementation has not commenced. However, if he starts implementation after filing the return, he has to file an amended return to report the reference number.
For example, suppose a notifiable arrangement giving a PAYE-related advantage is made available to a client in March of this year but is implemented in September. If the client receives the reference number in September—within the statutory time limit—the reference number will be put first on the 2008-09 P35, submitted in May 2009. However, if, as encouraged by Her Majesty’s Revenue and Customs guidance, the promoter sends the reference number to the client in March of this year, when he receives it from HMRC, the client is placed in an awkward position. When he submits the 2007-08 P35 in May 2008, there is no obligation to put the number on the P35 because the arrangement has not been implemented, and a decision to implement may not have been taken. However, when implementation subsequently takes place in September, an obligation is created to report the reference number on the P35 return for the year of assessment in which the number was received, that is the previous year. Therefore, an amended P35 return must be submitted.
There does not seem to be a policy reason for HMRC to receive the reference number earlier than on the return for the year in which it would have appeared had the promoter provided the reference at the end of the statutory time limit. Therefore, amendment No. 296 proposes that regulation 8 requiring the taxpayer to report the reference number should refer to the return for the later of the accounting period or year of assessment for which the reference number is received, and the accounting period or year of assessment in which the first transaction forming part of the arrangements is entered into. That avoids the requirement to amend a return that has already been submitted, but it does not disadvantage HMRC. It will still get notification of the scheme reference number when it needs it.
The amendment is somewhat technical and is designed to be helpful. We look forward to the Financial Secretary’s comments.

Jane Kennedy: Good morning, Sir Nicholas. The draft regulations that we are considering today are limited to the changes necessary to implement the measures in the Bill. There is concern in respect of the point raised by the hon. Gentleman. HMRC has said, in its published response to a constructive consultation on this area, that it will hold further discussions with interested parties over the coming months on how the current system of reporting scheme reference numbers by users might be improved and simplified. The issue addressed by the amendment is a fair representation of the concern but it deals with only one aspect of a broader range of issues that it is sensible to deal with as a package at a later date.
HMRC is considering changing the rule to reporting the scheme reference numbers when the scheme is implemented. Therefore, it has taken on board the point raised by PricewaterhouseCoopers. However, there are further issues, including transitional issues and the timetable for amending the return forms on which most SRNs are notified.
I hope that, with those reassurances, the hon. Gentleman will note that we have accepted the concerns that have been raised, but there are one or two other areas that we would like to be resolved all at the same time and in a tidier way than the amendment would allow for.

David Gauke: I appreciate the Financial Secretary’s response and her recognition that this is a legitimate issue. In light of that, and in the expectation that the matter will be addressed, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 38, as amended, agreed to.

Clause 112 ordered to stand part of the Bill.

Clause 113

Time limits for assessments, claims etc

David Gauke: I beg to move amendment No. 280, in clause 113, page 70, line 25, after ‘provision’, insert
‘under which the amendments can take effect only in relation to claims and assessments for a fiscal year starting after the date in which the order is made’.
Clause 113 implements schedule 39 and relates to the time limits for assessments and claims. We are changing the period of time in which assessments on claims must be made. There is concern that, for example, a person who believes that he has five years, 10 months to make an existing claim and decides not to do so until the end of that period because he cannot foresee whether his circumstances may change, may now find himself time-barred because the time limits are reduced to four years. That is unfair. The Institute of Chartered Accountants has raised the issue of legitimate expectations.
In light of that concern, we propose in the amendment, essentially, a transitional arrangement. The amendment will only come into effect in relation to claims and assessments for a fiscal year starting after the date on which the order is made. Therefore, the circumstances that I have outlined will not apply and transitional arrangements will address those. That is the issue behind the amendment. Again, we should be grateful if the Minister responded.

Jane Kennedy: Schedule 39 aligns when HMRC can make assessments to bring tax into charge if too little has been paid or too much claimed. It also aligns the time limits for taxpayer claims. There has been extensive consultation, and it is worth telling the Committee that that Law Society has said:
“We applaud HMRC’s attempts to align time limits structures across IT, CT, VAT, PAYE and NICs”—
income tax, corporation tax, VAT, pay-as-you-earn and national insurance contributions. It continued:
“It is our view that this makes a great deal of sense and will make, it is hoped, compliance with tax laws somewhat easier and provide greater certainty.”
That has encouraged us that the route that we are taking is right.
The schedule sets a four-year time limit for assessments, which is a change from six years for a number of taxes—inheritance tax, corporation tax and capital gains tax—and from three years for VAT. It also sets a six-year time limit for assessments if the taxpayer has failed to take reasonable care, which is a change from 20 years for income tax, capital gains tax and corporation tax, and a 20-year time limit for assessments by HMRC in certain circumstances.
The amendment would constrain the transitional provisions that will be contained in the Treasury’s order introducing the new time limits. The transitional arrangements that we envisage are that we will lay the commencement order by 1 April 2009 to introduce the time limits for claims and assessments from 1 April 2010. The new time limits will therefore apply to claims made after that date. The arrangements will ensure that it is clear to everyone which time limits are changing and when. The main reason for not making the change suggested in the amendment is that it would introduce significant complication. It would mean that different sets of rules applied to different periods in matters as basic as a claim or an assessment.
A further reason not to accept the amendment is that it ignores the aim of aligning taxes. Giving taxpayers extensive notice of a change in time limits, as we propose, is a fair way to introduce such a change. The time limits will be confirmed in legislation a year in advance, giving taxpayers time to make claims for earlier years. HMRC will use the period in between to publish extensively the changing time limits and situations in which taxpayers may be able to make claims. If the time provided does not prove enough for taxpayers’ claims, we will consider delaying the introduction of the new time limits.
Given the strong support that I have mentioned for this package of measures to align time limits, it is right that taxpayers should see the benefits of them as soon as is reasonably possible. Our proposals meet that challenge, and I hope that the hon. Gentleman will withdraw the amendment.

David Gauke: We do have some specific concerns to turn to when we debate the next group of amendments, but I am grateful to the Financial Secretary for her comments that HMRC will seek to raise awareness of the change in the time limits for assessments and so on, and that it will keep the matter under review. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

David Gauke: I beg to move amendment No. 278, in clause 113, page 70, line 25, at end add—
‘(4) No order may be made under subsection (2) in respect of the amendment made by paragraph 12 of Schedule 39 unless—
(a) the Commissioners of Her Majesty’s Revenue and Customs have laid a report before the House of Commons —
(i) demonstrating that they can identify all individuals who have overpaid income tax in previous years, and
(ii) stating what arrangements they will make to refund them the tax they have overpaid, and
(b) the House of Commons has by resolution approved those arrangements.’.

Nicholas Winterton: With this it will be convenient to discuss amendment No. 277, in schedule 39, page 385, line 21, leave out paragraph 12.

David Gauke: These amendments have been suggested to us by the Low Incomes Tax Reform Group, an organisation that we have mentioned a number of times of late in the Committee. Paragraph 12 of schedule 39 reduces the time limit for reclaiming overpaid tax from five years and ten months to four years. The LITRG makes the point that it has no objection to alignment when it is for the better operation of the tax system, but that it should not take place for its own sake, particularly if it will cause an erosion of the rights of unrepresented taxpayers.
There is a general concern about overpaid tax, so it would be helpful if the Minister were to give some details of any estimate that HMRC and the Treasury have made of the levels of overpaid tax.
To illustrate the scale of the problem of unrepresented taxpayers, in particular, not claiming back tax that they have paid, but which they do not owe, in 2004-05, the pensioner tax back project repaid 50,000 pensioners some £20 million. It is also worth mentioning the arrangements for the 10p tax rate for savings income. Some people are concerned that there will be large amounts of overpaid tax, because the savings rate will not be claimed. In those circumstances, there is considerable and understandable concern that reducing the time in which people have a right to claim from five years, 10 months, to four years might leave innocent taxpayers who have overpaid out of pocket and not in a position to reclaim. I acknowledge the Financial Secretary’s more general remarks about schedule 39, but that specific matter has raised genuine concerns.
There are two approaches to that matter, as set out in the amendments. The simplest approach is set out in amendment No. 277, which would simply delete paragraph 12 of the schedule, so that we retain the existing position. Of course, there would not be full alignment, but as the LITRG says, alignment for its own sake is perhaps not the strongest argument. Alternatively, if the Government are determined to align all these matters along four years, the LITRG has proposed that no order to change the assessment time limit be made unless HMRC can satisfy the House of Commons that it can identify all the individuals who have overpaid income tax in previous years, and state the arrangements to refund them. That might cause some administrative difficulties—we shall see—but it gives the Government the opportunity to continue their policy of alignment while addressing the concerns that I have tried to outline this morning. If the Financial Secretary is minded to accept one amendment over the other, we would be more than happy to oblige.

Jane Kennedy: Amendment No. 277 would remove the long-standing symmetry between assessment and claim time limits, and allowing a longer time limit for claims and assessments would present a significant risk to tax revenues. For that reason, if for no other, I am not attracted to it. It would result in a one-way flow, because HMRC would forego its right to assess underpaid tax, but taxpayers would be allowed to make late claims. Under the clause and the schedule, taxpayers will still be able to make income tax claims beyond the time limit if they have a reasonable excuse for not making the claim on time and if they make the claim without unreasonable delay once that excuse has been accepted.
Amendment No. 278 would require HMRC to identify all taxpayers, as the hon. Gentleman described, who have overpaid tax, and to make arrangements to refund them. He ought to think carefully about what that would mean: it is not possible with self-assessed tax, because HMRC does not have the information necessary to identify how much tax everyone in the UK should, and does, pay, and therefore any difference between the two figures. Requiring everyone in the UK by law to send HMRC full details of their earnings would represent a significant administrative burden, not just for HMRC, but for everybody, and would be of no benefit to most people. Instead, therefore, HMRC promotes the ability to claim through communications with taxpayers, advertising and so on.
HMRC will make sure that all taxpayers are informed of the change in time limits. It will work with taxpayers’ representatives, including the low incomes tax reform group ,to identify which groups of people are likely to be able to make which kind of claims. It will use publicity on the new time limits to advise them how to make a claim, and it is planning another tax back campaign along the lines of the one in 2000 to which the hon. Gentleman alluded, to encourage individuals to claim overpaid tax. It will target pensioners in particular.

Peter Bone: Will the Minister tell us how much overpaid tax will not be refunded to taxpayers as a result of the change?

Jane Kennedy: I was going to come on to the two questions of detail. I do not have that sort of information with me, but I will find it, in so far as it is available, and provide it to the Committee.
I cannot say much more. I understand the motivation behind the amendments, but, if tax has been overpaid, individuals can reclaim it and HMRC is committed to ensuring that people are aware that they can do so. HMRC will work to promote and advertise such rights over the coming weeks. I hope that the hon. Member for South-West Hertfordshire will accept that reassurance that we take his concerns seriously.

David Gauke: I welcome the Financial Secretary’s remarks, but there is still serious concern about overpaid tax. We will not press the amendments, but we may return to the issue at a later stage. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 113 ordered to stand part of the Bill.

Schedule 39

Time limits for assessments, claims etc.

David Gauke: I beg to move amendment No. 297, in schedule 39, page 384, line 9, at end insert
‘except that for claims relating to tax years up to and including 2007/08 the reference to “4 years” shall be “6 years”.’.
The schedule raises similar issues to clause 113. I would be grateful for the Financial Secretary’s comments on the time limit for claims for error or mistake being reduced from six years to four years, and how she seeks to justify the measure. The amendment probes further what we have already debated.

Jane Kennedy: The amendment raises two issues that we have already touched on. First, it would leave an unbalanced situation. Until 5 April 2014, taxpayers could make claims relating to tax for six years, but HMRC could assess claims only for four years, unless the tax loss was careless or deliberate. The amendment would remove the long-standing symmetry between assessment and claim time limits. Allowing a longer time limit for claims than for assessments would involve a high risk for tax revenues. It would mean in some years forgoing underpaid tax when taxpayers could still make late claims. I have described that as a one-way flow of revenue. Secondly, the amendment would need complicated transitional rules as to what time limits applied. I hope that with that short response the hon. Gentleman will accept that we are alive to his concerns, but that the proposals in the Bill are sensible.

David Gauke: I note the Minister’s comments on it being a one-way street or one-way flow and her point about symmetry, although we are talking about a relationship between HMRC and the taxpayer that is not entirely symmetrical. Taxpayers are often hard pressed, unrepresented and in a difficult position, so I continue to believe that there is an issue in this regard and, as I have said, we might return to it at a later stage. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

David Gauke: I beg to move amendment No. 298, in schedule 39, page 384, line 30, after ‘a’, insert ‘deliberate’.

Nicholas Winterton: With this it will be convenient to discuss amendment No. 299, in schedule 39, page 384, line 33, after ‘has’, insert ‘deliberately’.

David Gauke: I should explain initially—no doubt the Financial Secretary will have noted this—that amendment No. 299 should use the word “deliberate”, rather than “deliberately”, so I should clarify that grammatical point. The amendments relate to assessments involving a loss of income tax or capital gains tax which has been brought about deliberately by the person. The provisions in paragraph 9 stipulate that that loss of income tax or capital gains tax must be
“attributable to a failure by the person to comply with an obligation”
or
“attributable to arrangements in respect of which the person has failed to comply with an obligation.”
The amendments are in part probing. They seek a better explanation of what the word “failure” means in those two contexts and of whether that covers simple carelessness or means something stronger. The attempt to insert “deliberate” is intended to tighten that definition so that the provisions in paragraph 9 will not come into effect if someone is simply careless. We would be grateful for the Minister’s views on those matters.

Jane Kennedy: Taxpayers have a long-standing obligation to notify HMRC that they are liable to tax. If a taxpayer does not provide such notification, HMRC might not find out for some time. HMRC, therefore, needs time to investigate their affairs and quantify the tax due. Amendments Nos. 298 and 299 would make the extended time limits apply only if the failure to notify liability or use of a scheme was deliberate, but they ignore the fact that that provision is not a penalty. It requires the taxpayer to pay the tax, if they have not paid because they did not notify HMRC. HMRC owes it to those taxpayers who come forward and arrange to pay tax not to allow those who do not do so to have a significant competitive advantage.
If the amendment were made, HMRC would have to prove that a taxpayer or a company had deliberately failed to notify it of their tax liability, and it should be clear to everyone that that would be extremely difficult. Even if a taxpayer has deliberately failed to notify HMRC of business activity or the use of a disclosable scheme, evidence to prove that that is the case would have to be given by HMRC. Those difficulties would genuinely arise if the amendment were made, so I hope that the hon. Gentleman will accept that that would lead me to resist the amendment if it were pressed.

David Gauke: Again, we will not be pressing the amendment, but I think that it was an important point to raise. I am not sure that the symmetry between the taxpayer and HMRC is necessarily present in the way the Government profess—carelessness can extend the various limits available to HMRC—and I am not certain whether the taxpayer benefits from the same rights. None the less, we acknowledge the Financial Secretary’s comments and some of the practical difficulties, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Jeremy Browne: I beg to move amendment No. 194, in schedule 39, page 385, line 37, leave out from ‘discovers’ to ‘that’ in line 38 and insert
‘within four years of that information having been provided’.

Nicholas Winterton: With this it will be convenient to discuss amendment No. 300, in schedule 39, page 385, line 38, after ‘later’, insert
‘during the period within which it is possible for an assessment to be raised to recover the tax lost’.

Jeremy Browne: It seems strange to make a contribution when there is no test match starting today. However, we can look forward to the shallower pleasures of limited-overs cricket for the next few weeks.
The amendment refers to paragraph 15 on page 385, which has already been touched on, because we have discussed more minor amendments on the same point. Sub-paragraph (5) states:
“For the purposes of this Act a loss of tax or a situation is brought about carelessly by a person if the person fails to take reasonable care to avoid bringing about that loss or situation.”
Sub-paragraph (6)(b) states that
“the person who provided the information, or the person on whose behalf the information was provided, discovers some time later that the information was inaccurate”.
Our concern is that a period “some time later” is a rather vague basis for the taxpayer to know their position. The amendment would change that phrase to
“within four years of that information having been provided”.
The amendment is as simple as that, and I am interested to hear the Financial Secretary’s response. I ought to say that we are not wedded to a period of four years. If she thinks that another figure is preferable, the Committee may well be persuaded. However, the principle of a specified time limit as opposed to the expression, “some time later” is of value. With your indulgence, Sir Nicholas, may I say that, although amendment No. 195 is not in this group, it relates directly to this matter? It would put the measure in place from 6 April 2009, so that there would be a period for people to adjust to the proposal. Having made that point, I will not feel the necessity to make it later.

David Gauke: I endorse the hon. Gentleman’s words: test cricket is a far superior game to Twenty20 cricket. I share his view that there is a problem with the measure. Amendment No. 300, which I tabled with my hon. Friends, reminds me of the Conservative amendment with regard to deceased persons that the Financial Secretary graciously accepted last Tuesday. We agreed in the Committee that there was no point in the time period within which information should be provided being any longer than the period in which tax could be assessed. Amendment No. 300 makes a similar point regarding the period of time in which it is possible for an assessment to be raised to recover lost tax. There is a parallel to be drawn: given that I was successful with our earlier amendment, I thought that that would be a particularly persuasive argument for the Financial Secretary, but we shall see.

Nicholas Winterton: We will see whether that argument falls on favourable ground. [Interruption.]

Jane Kennedy: As my hon. Friend the Member for Telford is proposing an expedition next Wednesday evening, if time will permit, to a Twenty20 game, I am not so dismissive.

David Gauke: I wish to clarify that I am not anti-Twenty20 cricket, but test cricket is none the less the greater form. I think that my diary is free for that evening.

Nicholas Winterton: The intervention had something to do with numbers so I will allow it. [Interruption.]

Jane Kennedy: My hon. Friend the Exchequer Secretary says that it is all my fault for accepting the amendment earlier this week. With regard to the point about the phrase, “some time later”, what was said sounds reasonable, and it is important that I respond to it thoughtfully.
The legislation makes it clear that after six years a careless inaccuracy cannot be corrected, so the taxpayer knows that he or she need not inform HMRC. The Bill replicates the definition used for penalties for incorrect returns in the Finance Act 2007: a taxpayer should take reasonable steps to tell HMRC if he or she finds an error in information given to HMRC. Both the amendments seek to restrict the time available to taxpayers to do so, which would mean that HMRC would not be told of certain errors that led to the underpayment of tax. It would also mean that the definition for a careless loss of tax would no longer be aligned with that used for penalties, which would be confusing for taxpayers. The onus would be on HMRC to demonstrate careless or deliberate behaviour, for both penalty purposes and the assessment of time limits. That definition of a careless loss of tax does not create any new obligation to notify HMRC beyond that which already exists. Instead, it clarifies the situation as a careless loss of tax. The alignment of time limits, as I said earlier, was welcomed, because overall, the changes in time limits give taxpayers certainty earlier. However, giving that certainty to those who know there are inaccuracies in their returns but choose not to tell HMRC, does not meet the objective of ensuring that taxpayers pay the right amount of tax at the right time. 
The hon. Member for Taunton spoke on amendment No. 195, which would mean that the schedule applied only to claims made on or after 6 April 2009. In the Budget note accompanying the changes, we said that the new time limits would not be introduced in full until 1 April 2010 following extensive publicity, as I have described. That will ensure that taxpayers have sufficient time to make any necessary claims or preparations. As a result, the amendment is not necessary. I hope that all three amendments were tabled in a probing spirit, and that I have reassured the Committee about the concerns that have been raised.

Jeremy Browne: I will spare you my views on all the different forms of cricket, Sir Nicholas, and just say that I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 236, in schedule 39, page 386, line 21, after ‘500(4)’, insert ‘and (9)’.
No. 237, in schedule 39, page 386, line 31, at end insert—

‘FA 199126A In section 65(6) of FA 1991 (additional assessment to corporation tax on receipt of reimbursement expenditure), for “six years” substitute “4 years”.’.
No. 238, in schedule 39, page 389, line 34, at end insert—
‘51A In section 840A(1) (claims for relief for backdated pensions charged on arising basis) (inserted by Schedule 7 to this Act), for “on or before the fifth anniversary of the normal self-assessment filing date for” substitute “not more than 4 years after the end of”.’.—[Jane Kennedy.]

Question proposed, That the schedule, as amended, be the Thirty-ninth schedule to the Bill.

David Gauke: It will be a short stand part debate. I have one question, which I could have addressed on amendments Nos. 298 and 299 but it was not directly related to that group. It involves returning to paragraph 9 of schedule 39, which concerns the extended time periods that may be available for HMRC assessment. Under new subsection (1B), the circumstances include those where the loss has been brought about by another person as opposed to the taxpayer—that is, a third party or an adviser. Concerns have been raised about that, given that the taxpayer may be entirely innocent and not complicit in any way. I have not proposed an amendment and I do not advocate deleting the new subsection, but could the Minister briefly inform the Committee of the thinking behind it? Does she have any concerns that taxpayers may be treated unfairly as a consequence of it?

Jane Kennedy: I do not, but it is always helpful to give the issue some thought. The tax assessment can be made only to require a taxpayer to pay the tax that they should have paid in the first place and that other taxpayers have had to pay. That is a basic obligation, it is not a penalty. It would not be fair on other taxpayers if the tax remain unpaid. The purpose of the extended time limits is to give HMRC more time to identify and to quantify loss of tax where necessary. It has long been that case that time limits are extended where a person acting on behalf of the taxpayer is negligent. Where that happens, there is recognition that the taxpayer ought not to be penalised unfairly. The schedule reduces the time limit in those circumstances from 20 years to six years.
During the debate, I set out the purpose of the schedule, which is to align the time limits. That alignment has been warmly welcomed. Representative bodies have described harmonised time limits as reasonable, sensible and logical. I hope that the hon. Gentleman will accept that, given the approach that HMRC will develop with the new arrangements, there will be a willingness to recognise where such an event has occurred and, as I have said, to work in co-operation with taxpayers who are seeking to be compliant.

Question put and agreed to.

Schedule 39, as amended, ordered to stand part of the Bill.

Clause 114

Correction and amendment of tax returns

Amendment made: No. 239, in clause 114, page 71, line 39, at end insert—
‘( ) In paragraph 61(1)(a) and (3)(a) (consequential claims etc), for “34(2)(b)” substitute “34(2A)”.
( ) In paragraph 88 (conclusiveness of amounts stated in return)—
(a) in sub-paragraph (3)(b), omit the words from “and” to the end,
(b) in sub-paragraph (3)(c), for “34(2)” substitute “34”,
(c) in sub-paragraph (4)(b), for “the end of the period specified in paragraph 34(1)” substitute “the completion of the enquiry”, and
(d) in sub-paragraph (4)(c), for “34(2)” substitute “34”.
( ) In paragraph 93(1)(b) (general jurisdiction of Special or General Commissioners), for “34(2)” substitute “34”.
( ) In the following provisions, for “34(2)” substitute “34”—
(a) in TMA 1970—
(i) section 46B(2)(aa) (questions to be determined by Special Commissioners),
(ii) section 46C(2)(b) (jurisdiction of Special Commissioners over certain claims included in returns),
(iii) section 46D(2)(aa) (questions to be determined by Land Tribunal), and
(iv) section 55(1)(a)(ii) (recovery of tax not postponed), and
(b) in ICTA, section 754(2E) (assessment, recovery and postponement of tax).’.—[Jane Kennedy]

Clause 114, as amended, ordered to stand part of the Bill.

Clauses 115 and 116ordered to stand part of the Bill.

Schedule 40

Penalties: amendments of Schedule 24 to FA 200740

Jane Kennedy: It has been my practice to move Government amendments formally in the event that we might have a debate and I can hear the concerns of the Committee and respond appropriately.

Amendment proposed: No. 240, in schedule 40, page 393, line 17, after ‘T’, insert ‘deliberately’. .—[Jane Kennedy]

Nicholas Winterton: With this it will be convenient to discuss amendment No. 301, in schedule 40, page 393, line 17, after ‘T’, insert ‘knowingly’.

David Gauke: We are so enthusiastic about this amendment that we have even tabled one that is very similar; it refers to “knowingly”, rather than “deliberately”. A number of representations from professional bodies have suggested that this was appropriate. We are delighted that the Government are thinking along the same lines. I do not think that there is any need for me to say anything more.

Nicholas Winterton: Does the Minister wish to speak? If she does, I am happy to call her.

Jane Kennedy: I have only one thing to say, which is that the reference to “after ‘T’” took me back to cricket.

Amendment agreed to.

David Gauke: I beg to move amendment No. 302, in schedule 40, page 394, line 16, at end insert—
‘(A2) For this purpose a person shall be deemed to have disclosed an inaccuracy if he corrects the inaccuracy in accordance with regulation 34(3) of the Value Added Tax Regulations 1995 provided that if requested to do so he subsequently gave HMRC the help and access referred to in sub-paragraph (1)’.
Again, this is a rather technical amendment. We have tabled it as a consequence of representations made by the Institute of Chartered Accountants. It relates to disclosure of VAT errors. The ICA is concerned that amendments to the Finance Act 2007 provisions in paragraph 9 essentially mean that a deregulatory provision will prove ineffective. The Government have decided to increase the VAT de minimis limit for mandatory disclosure of VAT errors under regulation 34(3) of the Value Added Tax Regulations 1995 from £2,000 to £10,000, which is a welcome deregulatory measure. The concern is that the revised penalty rules will deter most taxpayers from taking advantage of this deregulation.
The reason for that is that paragraph 9 largely negates this provision because it grants reduction in penalties for disclosure of an underassessment subject to the taxpayer meeting certain conditions. Where a person seeks to take advantage of the Government’s deregulatory relaxation, he cannot benefit from the reduction in paragraph 9, as the correction will not meet the conditions in sub-paragraph (1). This effectively means that it will be dangerous for a taxpayer to correct an error on a subsequent tax return unless he also makes a separate disclosure of the inaccuracy to HMRC, as a taxpayer has no way of knowing when he discovers an error whether HMRC might consider the error as one arising due to failure to take reasonable care.
The effect of the Government’s deregulatory intention in increasing the de minimis limit will, in the view of the ICA, impose a greater rather then lesser burden on business, as the business in question will have to make two notifications instead of one. It is unlikely that the Government intended that this deregulatory measure should deny taxpayers the benefit of paragraph 9, and the amendment would give the taxpayer that benefit provided that he meets the appropriate conditions in response to a later request for information by HMRC. As I said, this is a technical amendment. We hope that it is consistent with the Government’s intention of reducing the burden on reporting VAT errors. As the drafting stands there appears to be a concern, which we hope the amendment will enable the Government to address.

Jane Kennedy: The hon. Gentleman is right in saying that overall, schedule 40 has been welcomed as a measure reducing administrative burdens on business. He is also right to say that there has been concern about how the error-correction procedure will interact with the new penalties for incorrect returns. In the past, so-called VAT voluntary disclosures have been guaranteed not to attract a penalty. Under the new regime, most will still escape a penalty, but this will no longer be guaranteed. Instead, whether a penalty is due will depend on whether that error was careless or deliberate and on the quality of the taxpayer’s disclosure. The change is being made because the guaranteed escape from penalty was undermining the key message that taxpayers should declare the right tax at the right time. HMRC have been working closely with VAT experts from industry and representative bodies to develop clear policy and guidance in this sensitive area.
The majority of errors identified by taxpayers for correction are neither careless nor deliberate, so penalties will not be an issue. Where a taxpayer is unsure whether they have taken reasonable care with their tax affairs, they should notify any resulting errors to HMRC separately even if they are below the de minimis limit. In this way they can make a full unprompted disclosure, reducing the penalty to nil. This is because the special arrangements for correcting smaller errors are not necessarily visible to HMRC. The onus is on HMRC to determine whether reasonable care has been taken in an individual case, and they cannot do that unless they are aware of the facts. In considering the interaction between the new penalties and the VAT error correction procedure, HMRC have tried to balance reducing administrative burdens on businesses with encouraging taxpayers to declare the right tax at the right time. It is quite proper that we have a debate as to whether that balance is right.

Peter Bone: In reality, if a business person discovers that they have made a VAT error and correct it—as does happen—under the new rules there is no incentive to tell the Revenue. Telling the Revenue might attract penalties that one would attract anyway if the error were discovered, so the provision is actually a disincentive to declare the error voluntarily.

Jane Kennedy: I do not think that most compliant taxpayers would see it in that way. The hon. Gentleman’s experience has been very valuable in Committee and I acknowledge that he has experience of precisely these matters. However, HMRC, in consultation with VAT experts and business, believe that the balance is right in terms of encouraging the taxpayer to be compliant, to get the tax right and therefore to report errors.

Peter Bone: I am thinking of a situation where the taxpayer does make a correction, so the tax is then right; however, there is not the incentive to tell the Revenue because penalties might be imposed. Before, they knew that if they told the Revenue, there would not be any penalties.

Jane Kennedy: If it was later discovered that there was an error, their not telling HMRC about an error that they have found would risk a penalty of up to 30 per cent. of the tax understated. HMRC believes that that is the incentive to the taxpayer. As I have explained, the vast majority of errors are not careless or deliberate, and the vast majority of VAT payers do pay correctly and on time, but this amendment, if enacted, would displace the balance that HMRC is confident it has achieved. VAT errors identified by the taxpayer of as much as £50,000 would become virtually exempt from penalty, regardless of the underlying behaviour, which would seriously undermine the regime’s integrity. That would be unfair to the wider taxpaying population and would seriously undermine the objective of the penalty regime to encourage people to take care with their tax. It is also important to remember that the new penalty regime will apply to all taxes and duties. That will enable clear deterrent messages to be sent and it will help to ensure a fair and consistent approach to errors. However, it means that we need to think very carefully before creating or expanding special rules for particular taxes or groups.
I hope that I have explained the purpose behind the schedule and responded to the concerns expressed when the amendment was moved.

David Gauke: Again, we are grateful for the Financial Secretary’s remarks. However, as I said earlier, there is an intention here regarding what the Government are trying to do on raising the de minimis notification requirements and the tax penalty regime, and I am not sure that that has been satisfactorily considered in this process. However, I note the Financial Secretary’s remarks and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 241, in schedule 40, page 395, line 23, at end insert—
‘15A (1) Paragraph 19 (companies: officers’ liability) is amended as follows.
(2) In sub-paragraph (1), for the words from “of the company” to “as they” substitute “of the company, the officer is liable to pay such portion of the penalty (which may be 100%) as HMRC”.
(3) For sub-paragraph (5) substitute—
“(5) Where HMRC have specified a portion of a penalty in a notice given to an officer under sub-paragraph (1)—
(a) paragraph 11 applies to the specified portion as to a penalty,
(b) the officer must pay the specified portion before the end of the period of 30 days beginning with the day on which the notice is given,
(c) paragraph 13(2), (3) and (5) apply as if the notice were an assessment of a penalty,
(d) a further notice may be given in respect of a portion of any additional amount assessed in a supplementary assessment in respect of the penalty under paragraph 13(6),
(e) paragraphs 15(1) and (2), 16 and 17(1) to (3) and (6) apply as if HMRC had decided that a penalty of the amount of the specified portion is payable by the officer, and
(f) paragraph 21 applies as if the officer were liable to a penalty.”’.—[Jane Kennedy.]

Nicholas Winterton: With this, it will be convenient to discuss the following: Government amendment No. 242.
Amendment No. 308, in schedule 41, page 407, line 37, at end insert—
‘and in pursuing the officer, HMRC shall have regard to the proportion of the penalty that in all the circumstances is just and reasonable to allocate to the officer.’.
Government amendment No. 243.

David Gauke: This group of amendments relates to the liability of company officers. A number of concerns have been expressed with regard to the original proposals in the Bill. In broad terms, they are: that company officers may be unduly liable; that they may be seen to be an easy target for HMRC; that the proportion of the penalty levied against an individual officer, as opposed to the company, might be unnecessarily and inappropriately high; and that more than the correct amount could be obtained by penalties both to officers and to the company itself.
The thinking behind amendment No. 308 is that in pursuing an officer, HMRC should have regard to the proportion of the penalty that, in all circumstances, is just and reasonable to allocate to the officer. On the face of it, it is difficult to argue against that and I am sure that the Minister will assure us that HMRC will not be seeking to pursue an officer for more than what is just and reasonable to allocate to the officer.
The Government have also tabled amendments on this issue, which to some extent seek to address the concerns of the various bodies that scrutinise these matters closely. We look forward to hearing what the Minister has to say about the Government’s amendments, and to testing whether they satisfactorily address the real and understandable concerns that exist about how company officers may be pursued.

Jane Kennedy: The Government amendments are largely technical and I will come to the issue that they address in a moment.
Before a penalty can be pursued from an officer of a company, who is usually a director, HMRC has to demonstrate that the inaccuracy was deliberate and was caused, at least in part, by the director. It is right that HMRC officers should take into account all the circumstances and that they should act reasonably when deciding how much of the penalty should be collected from the officer. However, it is neither necessary nor desirable to specify that in legislation, as suggested. To do so in the Bill, but not in relation to other matters where HMRC makes decisions about penalties, would be inconsistent and would perhaps call into doubt the basis on which other decisions should be made.
As we have debated many times while considering these powers, HMRC officers are required to act reasonably at all times. A number of different factors should be taken into account when deciding the penalty to be paid by the director—for example, how many directors were involved, and the extent of personal gain by each. The provision will also be helpful in combating cases where a company deliberately becomes insolvent and transfers its activity to a new company in order to evade tax liabilities. It may be a surprise to the Committee, but there are occasions when that happens.
On Government amendment No. 241, if there is a deliberate inaccuracy in a company’s return that is attributable to an officer of that company, HMRC may pursue all or part of the penalty from that officer. As a result of further scrutiny by HMRC, it has come to light that the way in which the measure is drafted means that there is a risk that HMRC will not be able to assess such a penalty from the officer, and that the officer would not be able to appeal against a penalty. It is regrettable that that was not identified or addressed sooner, but it is important that it be put right before such penalties can be charged, from 1 April 2009. That is the purpose of our amendments.
I hope that I have addressed the points that the hon. Member for South-West Hertfordshire made, and I will happily listen what he has to say.

David Gauke: Again, we are grateful for the Financial Secretary’s comments and, in the circumstances, I beg to ask leave to withdraw the amendment.

Nicholas Winterton: The hon. Gentleman does not need to ask for leave to withdraw the amendment because it is not the lead amendment.

David Gauke: I should say one other thing. While we were debating the measure, I perhaps should have declared an interest because I am a company director—although I hope that interest will never be relevant.

Nicholas Winterton: We are grateful for that declaration.

Stephen Hesford: On a point of order, Sir Nicholas, on the amendment paper, the amendments that we are discussing are listed as dealing with a different schedule—schedule 41 instead of schedule 40.

Nicholas Winterton: May I respond to that point of order in a straightforward way? It is quite often the case that amendments relating to another schedule or clause can be grouped with an amendment relating to an earlier schedule. Will the amendments be put formally by the Minister when we reach schedule 41? They will. However, we will have discussed them under an earlier schedule. Does the Chairman make himself clear?

Stephen Hesford: Yes, Sir Nicholas.

Nicholas Winterton: I am grateful.

Amendment agreed to.

Schedule 40, as amended, agreed to.

Clause 118 ordered to stand part of the Bill.

Schedule 41

Penalties: failure to notify and certain vat and excise wrongdoing

David Gauke: I beg to move amendment No. 303, in schedule 41, page 404, line 32, after ‘failure,’, insert
‘or (if later) within one month after the time when the person first becomes aware of the failure,’.

Nicholas Winterton: With this it will be convenient to discuss amendment No. 304, in schedule 41, page 406, line 11, at end insert—

‘Suspension
16A (1) HMRC may suspend all or part of a penalty under paragraph 1 for an act or failure that is neither deliberate nor concealed by notice in writing to P.
(2) A notice must specify—
(a) what part of the penalty is to be suspended;
(b) a period of suspension not exceeding two years; and
(c) conditions of suspension to be complied with by P.
(3) HMRC may suspend all or part of a penalty only if compliance with a condition of suspension would help P to avoid becoming liable to further penalties under—
(a) paragraph 1 for any act or failure that is neither deliberate nor concealed; or
(b) paragraph 1 of Schedule 24 to the Finance Act 2007 for careless inaccuracy.
(4) A condition of suspension may specify—
(a) action to be taken, and
(b) a period within which it must be taken.
(5) On the expiry of the period of suspension—
(a) if P satisfies HMRC that the conditions of suspension have been complied with, the suspended penalty or part is cancelled, and
(b) otherwise, the suspended penalty or part becomes payable.
(6) If, during the period of suspension of all or part of a penalty under paragraph 1, P becomes liable for any other penalty, the suspended penalty or part becomes payable.’.

Nicholas Winterton: I call David Gauke again.

David Gauke: Thank you, Sir Nicholas, again. [Laughter.] May I say how pleased I am to learn that Government Back Benchers are paying such close attention and I shall see what I can do about it.
Amendment Nos. 303 and 304 relate to penalties for non-deliberate failure to notify. It might be worth making a general point about the policy because in their approach to enforcement and penalties the Government will want people to come back into the system. When people have erred and particularly where they have not deliberately erred but found that through some mistake they are in breach of the tax law and regulations, the Government will rightly want to ensure that they comply in future. The system has its deterrents and its punishments but the desire rightly must be to ensure that those taxpayers comply in future and that they regularise their arrangements. With regard to both of these amendments we must bear in mind whether the Government has quite got the balance right. That is the point that we are testing.
On amendment No. 303, in the proposals for late notification penalties, the penalty chargeable to a person whose failure to notify is not deliberate will normally be 30 per cent. of the potential lost revenue but can be reduced for an unprompted disclosure. The reduction will normally be to 10 per cent. of the potential lost revenue but can be greater, even to nil per cent. if HMRC is told about the failure within 12 months. This point is made by the Low Incomes Tax Reform Group—there are many unrepresented taxpayers who simply do not know that they need to notify HMRC of something and their non-culpable failure can go undetected for many years. When eventually they find out and notify HMRC, compliance officers have hitherto been empowered to agree a nil penalty. The LITRG says, however, that that will no longer be the case under these proposals. Consequently, the purpose of amendment No. 303 is to enable a reduced or nil penalty to be charged where HMRC is first told of the failure within 12 months of it occurring or within 12 months of the taxpayer first becoming aware of it, whichever is later.
There is a precedent for that within the tax credits system where a claimant is obliged to notify HMRC of a change of circumstances within one month of the change or one month of the claimant first becoming aware of it. Under the penalties proposals in schedule 41, there is scope for a nil penalty in special circumstances where the taxpayer has a reasonable excuse for not informing HMRC. However, the view of the LITRG—an organisation that has considerable experience in the sector—is that trying to persuade HMRC that the unrepresented taxpayer has a reasonable excuse is often a hopeless task. The amendment would therefore give greater certainty to the taxpayer and preserve the status quo.
Amendment No. 304 introduces a suspension regime in the context of these non-deliberate failures to notify. A key feature of the new penalty regime as a whole is the provision of penalties for failure to notify as a result of carelessness. We suggest that such penalties could be suspended for up to two years, because if a taxpayer has merely been careless, they should be encouraged to comply with the rules in future. The schedule 24 position can be distinguished from what we are talking about because HMRC argues that suspension is about curing systemic failures, to which schedule 24 relates, and it could be argued that a failure to notify is a one-off failure rather than a systemic problem, so suspension is not appropriate. To some extent, I am anticipating the argument that the Financial Secretary might make, but we point out that if the Government’s aim is to get people to comply and to keep complying, it would fit well into the framework to have a two-year suspension of penalties for careless failure to notify, on the condition that accurate tax returns were submitted on time in that period.
Such a requirement would be as measurable as any other criterion used for suspension and would give exactly the incentive that HMRC seeks to get taxpayers to operate properly. Without it, the incentive is for taxpayers to stay outside the system in the black economy. That is the thinking behind both of our amendments. The Low Incomes Tax Reform Group and the Chartered Institute of Taxation have made sensible representations to us on the issue, and we would be grateful if the Government closely considered the proposals.

Jane Kennedy: To prevent penalties from becoming a barrier to people coming forward when things have gone wrong, there are substantial reductions in penalties for disclosure by taxpayers. Paragraph 13(5) of schedule 41 says that if a person comes forward unprompted within 12 months of tax becoming unpaid as a result of a failure to notify, the penalty may be reduced to nil. That involves a date that is identifiable to the taxpayer, their advisers and HMRC, and it provides clarity on how long the additional reduction will apply. That is important to encourage people to come forward to HMRC early, and was amended in line with suggestions that were made during consultation. It means that someone who starts a business in one year and delays going to an accountant to sort out their tax until just before the following 31 January deadline—I can imagine that all the work of setting up in business could, on occasion, lead to that happening—would still be able to escape a penalty.
The hon. Gentleman says that he has heard representations that it is a “hopeless task”—that phrase was used—trying to persuade HMRC of a reasonable excuse. HMRC has made it clear that a person who had reasonable grounds for believing that an obligation to notify did not arise will have a reasonable excuse. That and other matters of interpretation will be published in HMRC guidance. If there are clear examples of HMRC not applying that, I will be happy to consider the examples. Let me give a few examples of what might constitute a reasonable excuse, but this is not an exclusive list: compassionate circumstances, such as serious illness, at the time when notification was required; doubt about whether an activity is taxable; and uncertainty about employment status when there is genuine doubt as to whether a person is self-employed.
A fundamental problem with the alternative proposed in amendment No. 303 is that it will be difficult to ascertain, in any verifiable way, when the taxpayer became aware of the failure. Where a taxpayer has a reasonable belief that an obligation to notify did not arise, they will not be charged a penalty. That will be so even if HMRC, or a tribunal, subsequently determines that the activity is taxable—an important safeguard for taxpayers.
An example is a case in which where there is genuine uncertainty about whether there is an obligation to provide notification. Someone may consider all the facts, take advice and conclude that their activity is not taxable. I think of my dad, who is an avid collector of small die-cast models of diesel trucks. He goes to events called swap meets, which other avid collectors of diesel trucks attend, and they swap trucks. The value of those items depends on the condition of the box as much as the model being swapped. Small amounts of money are exchanged, and we would not want to catch people engaged in that kind of hobby, which may, or may not, be a trade. That is not quite an interest to declare, but my dad came to mind when I was thinking about the details of the measure.
The concept of reasonable excuse will address that type of situation, and HMRC will publish guidance to make that clear. That mirrors the principle that is applied to incorrect returns: if a mistake is made, despite reasonable care being taken, it should not be penalised. If the amendment were accepted it might be perceived as unfair to the compliant majority who come forward to register and pay tax that is due on time. With no clear downside for those who fail to do so, compliant taxpayers may lose confidence in the fairness of the system.

Mark Field: I listened with interest to what the Minister said, particularly the example that she gave. The Opposition are concerned that that the bar is set too high. The reality, as far as I can see, is that for anybody with any previous business experience—through incorporation, or trading as a sole trader and thus having dealings with tax officers—and for anybody who has ever taken professional advice from an accountant and so on, will almost certainly be unable to claim under these provisions. We are trying to capture, as it were, such individuals, who have made a genuine mistake, in our amendment.

Jane Kennedy: I accept the point that the hon. Gentleman has made, and I undertake to keep that particular provision under close review to make sure that it works as intended, in the event that we resist the amendment.
Amendment No. 304 seeks to provide the facility to suspend penalties for failures to notify that are “neither deliberate nor concealed”. Conditions for suspension would be that a further failure to notify did not occur, and that a carelessly incorrect return should not be made for a period of up to two years. The suspension of penalties is an innovative aspect of the new penalties introduced for incorrect returns in the Finance Act 2007, which did a lot of good work. That is appropriate in the case of errors due to poor accounting or record-keeping systems. Conditions are set so that someone spends money to improve systems to prevent further inaccuracies, but the amendment seeks to apply similar provisions to the failure to notify penalties. However, there is an important difference, as HMRC believes that it would be unworkable. The obligation to notify a new taxable activity is a one-off, unlike submitting accurate returns, which is an ongoing requirement for most taxes.
It is hard to see what conditions could be set to help the taxpayer avoid a further penalty for failing to notify. The provision would be applicable only if they started another taxable activity requiring notification and, again, it is difficult to see how specific conditions could be set to help prevent them making an error in subsequent returns. It was suggested in the consultation that suspension of a failure to notify penalty should be made on the condition that routine tax obligations, such as filing returns and paying tax on time, are complied with for a period. That makes more sense, but there are still difficulties with that approach, not least because it could weaken and confuse the message that people must tell HMRC when they start a new taxable activity. Both amendments are unnecessary, particularly amendment No. 303. Amendment No. 304 is unworkable, so I suggest that neither amendment should be pressed further.

David Gauke: I welcome the Financial Secretary’s remarks about the concept of reasonable excuse. The term “hopeless task” was not mine, but was used by the low incomes tax reform group, which has a great deal of experience in this area. She made an interesting practical point about how HMRC would ascertain when somebody became aware, but again, I highlight the fact that the tax credit system permits that. She may have her own views about how that aspect of the tax credit system operates, but it does allow for that.
On suspension, I am not persuaded by the Financial Secretary’s comment that it is difficult to see how one could have a suspended penalty in such circumstances. One could do it on future notifications, ensuring that tax returns are filed on time and accurately. Therefore, I will withdraw amendment No. 303, but I will press amendment No. 304 to a Division. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 304, in schedule 41, page 406, line 11, at end insert—

‘Suspension
16A (1) HMRC may suspend all or part of a penalty under paragraph 1 for an act or failure that is neither deliberate nor concealed by notice in writing to P.
(2) A notice must specify—
(a) what part of the penalty is to be suspended;
(b) a period of suspension not exceeding two years; and
(c) conditions of suspension to be complied with by P.
(3) HMRC may suspend all or part of a penalty only if compliance with a condition of suspension would help P to avoid becoming liable to further penalties under—
(a) paragraph 1 for any act or failure that is neither deliberate nor concealed; or
(b) paragraph 1 of Schedule 24 to the Finance Act 2007 for careless inaccuracy.
(4) A condition of suspension may specify—
(a) action to be taken, and
(b) a period within which it must be taken.
(5) On the expiry of the period of suspension—
(a) if P satisfies HMRC that the conditions of suspension have been complied with, the suspended penalty or part is cancelled, and
(b) otherwise, the suspended penalty or part becomes payable.
(6) If, during the period of suspension of all or part of a penalty under paragraph 1, P becomes liable for any other penalty, the suspended penalty or part becomes payable.’.—[Mr. Gauke.]

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 16.

Question accordingly negatived.

It being twenty-five minutes past Ten o’clock, The Chairmanadjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at One o’clock.